Iron awe

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Spurred by the China boom, our miners are striking while the iron
ore is hot - but there's a problem. Jamie Freed reports.

Driving east from Perth towards the goldmining town of
Kalgoorlie, the lush landscape of the West Australian wheat belt
gradually reverts to the harsh red tones of Australia's centre.

After four hours on the road, at the small town of Southern
Cross, is a turn-off - a dirt track that ploughs through the
monotonous surroundings for about 50 kilometres. Here, at the open
pits of Portman's Koolyanobbing iron ore mine, Australian workers
are toiling around the clock to meet the demands of China's
emerging middle class.

There are few signs of civilisation near the mine, which lies
three hours west of Kalgoorlie's famous skimpy bars. But that
doesn't bother senior mine geologist Nick Payne, who must decide
which portion of the 100-metre-deep Pit K is the optimal area to
mine at the moment. He is trying to firm up a mining schedule
months in advance despite nature's inherent unpredictability.

Day and night, 365 days a year, gigantic, multimillion-dollar
Caterpillar trucks move thousands of tonnes of the iron ore onto
126-wagon trains that haul the rock 575 kilometres south-east to
the port of Esperance and off to East Asia.

While nowhere near the scale of BHP Billiton and Rio Tinto's
Pilbara operations hundreds of kilometres to the north-west - which
are so large as to nearly be unfathomable - Koolyanobbing is
working to the same drum beat, as China's seemingly insatiable
demand for steel shows no sign of abating.

And like mining giants BHP and Rio, Portman has undertaken a
major expansion to increase its production to 8 million tonnes of
iron ore next year. It is 6 million this year.

The reason for the expansion is simple: to maximise profits
during a period of high demand.

And if you ask any industry professional, whether a geologist,
engineer or company executive about the current demand for iron
ore, they'll say it's more than just strong. Nearly every one of
them will use the word "unprecedented".

"If you spoke to us three years ago, no one would have predicted
this," says Ralph Holmes, manager of iron ore processing for
CSIRO's minerals division.

But what a difference a few years can make.

With China industrialising at a breakneck pace, prices for iron
ore have risen to record levels and have translated to billions of
export dollars. Additionally, mining royalties have accounted for a
$1.2 billion state budget surplus in Western Australia announced
this week.

In April, major export producers including Rio, BHP and Brazil's
CVRD achieved a 71.5 per cent increase in benchmark prices
following annual negotiations with Japanese steel mills.

And for producers of iron ore, Australia's third-biggest export
behind coal and wheat, the boom times are set to continue.

Analysts at investment bank UBS recently raised their forecast
for next year's iron ore prices, predicting they would rise an
added 10 per cent above this year's record levels. Negotiations for
next year's prices are set to begin soon in Japan.

UBS previously had predicted a 20 per cent decline in iron ore
prices for next year.

But in the investment bank's recent glowing report, the analysts
note "iron ore represents one of the most important profit centres
for the mining industry".

Rio is expected to earn 60 per cent of its predicted $US5.7
billion ($7.5 billion) of profits from iron ore and coal next year,
while BHP should earn 40 per cent of its expected 2006 earnings of
$US9.1 billion from its carbon steel division. Rio, which in the
Pilbara operates the world's largest private rail network, is more
exposed to steel materials than BHP because it lacks a petroleum
division.

The surge in prices has also proven a boon for Portman, a
mid-sized producer now controlled by US iron ore pellet producer
Cleveland-Cliffs following a takeover bid earlier this year. Former
owner BHP shuttered the Koolynanobbing mine in the 1980s because it
was too small an operation for the multinational company, which had
used it for a pig iron steel plant. But under Portman's management,
the mine contributed the majority of the company's $41 million
half-year profit this year.

Another West Australian producer, Mt Gibson Iron, which ships
its product through the port of Geraldton, has also benefitted from
the rising prices.

And not surprisingly, several iron ore exploration companies are
eager to get their projects into production. At the bigger end of
the scale is Andrew "Twiggy" Forrest's Fortescue Metals, which
proposes a $2.3 billion project in the Pilbara. It has lofty
ambitions to become the "third force in [Australian] iron ore"
behind Rio and BHP, although Forrest has yet to find a financial
backer to build the rail and port facilities needed to get the
project off the ground.

At the smaller end, companies such as Gindalbie Metals, Midwest
and Murchison Metals hope to join Mt Gibson, by initially operating
smaller projects shipping through Geraldton and later expanding to
become mid-size players. They have been busy signing Asian steel
mills on as equity partners to help fund the projects and buy the
finished iron ore product.

Rio and BHP have had relationships with major steel companies in
Japan, China and South Korea for decades, but lately the biggest
growth has come from China.

Rio first contemplated expanding its iron ore business about
five years ago as part of a strategic growth plan which predicted
Chinese demand would increase, says Paul Bitencourt, a Perth-based
geological support manager for Rio Tinto Iron Ore Expansion
Projects.

But Chinese growth managed to exceed the company's bullish
forecasts, meaning ambitious $1 billion-plus expansion projects
such as increasing the capacity at its Port Dampier from 74 million
tonnes a year to 116 million tonnes a year outpaced initial
plans.

"We jumped into it having an expectation and certainly in the
end it has been more pleasing to us," Bitencourt says.

"I have been absolutely flat out with the expansion."

With the country's iron ore exports expected to rocket from 219
million tonnes in 2004 to 397 million tonnes in 2010, Bitencourt is
far from being the only overworked mining professional in Western
Australia.

Dylan Morgan, a plant process engineer at Rio Tinto's Mt Tom
Price mine in the Pilbara, says there is a lot of pressure for
workers to deliver.

"Anything we can produce, China will take at the moment," he
says. "Every extra tonne out the door is extra money for the
company and the shareholders."

In the past, the high-grade processing plant at which Morgan
works hasn't had to run at full capacity due to lack of demand.

The plant processed 12.4 million tonnes of iron ore last year,
although it can process 15 million tonnes.

But now that demand is finally high enough to put the equipment
in full gear, Rio is facing a different constraint: the skills
shortage.

"We can't get enough tradesman to keep the equipment running as
well as possible," Morgan says. "And every minute the plant is down
is critical."

Rio's problem is that there are a finite number of mechanics and
electricians in Australia and it must compete against other mining
companies and the huge North-West Shelf gas project off the coast
of Western Australia for these workers.

And the problem isn't limited to maintenance workers. Geologists
and engineers are also in high demand these days.

It was a different story back in 2002 when Morgan completed his
degree.

He applied for positions with 30 different companies and got one
interview. He accepted a job in early 2003 in the remote Pilbara
town of Tom Price, then the home of about 3000 company
employees.

Flash forward two years, and more than 4500 live in Tom Price.
Rio is building 51 more houses in the town to help ease an
accommodation shortage. BHP's similar company town, Newman, has
seen its population double in the past few years.

"The next three years will really push the companies to the
limits," says a BHP geologist who declined to be named.

Rio recently converted Marandoo, a mine near Tom Price, to a
fly-in, fly-out operation with workers based in Perth to stem the
housing crunch and to accommodate growing lifestyle demands from
mining workers who now have the upper hand in negotiations with
employers. The shortage of workers is so severe that contracted
truck operators can easily demand salaries above $100,000.

Portman is lucky in that its Koolyanobbing mine is driving
distance from Perth and Kalgoorlie, making it attractive for miners
with families. But with its operations in remote areas of the
Pilbara, BHP has suffered from the same problems as Rio.

Recruitment of skilled mining workers is tough because geology
and engineering aren't "trendy" subjects to study at university.
And universities have therefore cut back on courses in those areas,
creating a downward spiral.

Offering huge amounts of money to young miners only helps to a
limited extent. It's the convenience of living in capital cities
close to family and friends that attracts more Australians to
fields such as finance or law or IT rather than mining.

As Rio chief scientist Dr Robin Batterham notes: "The population
you can call on to work in iron ore [in industrialised nations] has
been diminishing since 1920."

The few who go into mining tend to be risk-takers who enjoy the
adventurous lifestyle and the sense of camaraderie obtained in a
small mining town such as Rio's Tom Price or BHP's Newman, where
there are instant friends and plenty of beers to go around. And
these days, the major companies are snapping them up more than six
months before they receive their degrees.

The skills shortage is so severe that Australian recruitment
agencies are setting up shop in places like South Africa to attract
mining personnel to Western Australia. Mining hotbeds in the
Americas such as Canada and Chile have also been targeted.

And as Dr Tapan Majunder, an professor of applied geology at the
Indian School of Mines, told the Herald at the Iron Ore 2005
conference in Fremantle earlier this week, some companies are
recruiting from less traditional regions.

"A lot of [Indians] have come to Australia," he said. "There are
two [former] students of mine in this room."

Matthew Cobbett, mining business development director at
engineering services firm Fluor, says employment at his company's
iron ore division, which does work for BHP, has jumped from 200 to
450 in the past few years.

"The skills shortage is certainly an issue in all of the
projects we are chasing," he says.

"The demand on engineering resources in Western Australia, and
mirror-imaged in Brisbane for coal, is unprecedented," he says. His
firm has 600 people based in Perth working on iron ore projects for
Rio and BHP, up from about 300 a few years ago.

Cobbett says the current resources boom is hardly the first, but
there are signs it is different from earlier ones.

"This is a more sustained peak [of a boom] than it has been in
the past," he says.

Rio's Bitencourt, who works on his company's expansion projects,
agrees with Cobbett.

"I think by the looks of it we probably have more than a couple
of years of steady demand," he says. "Whether the boom times will
remain for six, eight, 10 years we can always cross our fingers.
Certainly the view is on the long term."